subject: Real Estate Investing & Credit Bureaus' New Income Reports [print this page] If I were to ask you the question "Who knows how much I earn?" you would probably respond with two, possibly three organizations: the IRS, your mortgage lender, and maybe the bank who gave you your car loan. And you wouldn't be far off... until February 2010.
In 2009, congress passed a bill called the Credit Card Act, and the Federal Reserve set its rules to require credit card issuers to review an applicant's credit and income before issuing a credit card to them. However, because many stores offer instant discounts for immediate, in-store applications for a store credit card, the Act allows creditors to use "a reasonable estimate" of applicant's income, and that reasonable estimate is to be provided by the credit bureaus.
What does this mean for you, as a real estate investor (or even as a consumer)? What it means is that lenders and creditors who pull your credit can also pull the credit bureaus estimate of how much you earn, which may be extremely inaccurate. Another provision of the bill forbids lenders from declining loans or credit cards solely on the basis of these income estimates, which will lead to the lender demanding proof of income as a condition of the loan. However, many self-employed or cash-income earners will have an extremely difficult time disproving inaccurate credit bureau estimates.
The next question on most real estate investors and home owners' minds will be "How do the bureaus estimate my income?" Unfortunately, no one but the bureaus know, although they tell us that they'll use a statistical analysis of data found in our credit reports, such as the age of our loans and credit accounts, the speed with which we pay off debt, size of credit accounts, and many of the same measures used to calculate credit.
If you're a real estate investor, and have trouble proving your income, now is a good time to start documenting your income more attentively. For tax purposes, you probably already keep reasonable records of your expenses; consider documenting each penny of income as well as each deductible penny spent. If you don't invoice for services you render, start, and have each client sign a paid receipt (this will also help prevent disputes with clients). Keep photocopies of the checks you're written, not just the ones you write.
As far as the form these income estimates will take, Experian offers an estimate to the nearest $1,000, while Transunion offers an income range. A spokesman for Experian claims that when they estimate someone's income at $35,000, in 85% of cases the estimate will be accurate within $15,000. If that doesn't sound very precise and accurate to you, you're not alone.
For better or worse, we live in a society where information is eternal and can be accessed instantly online, and where privacy is no longer viewed as such the assumption it once was. Real estate investors are wise to zealously protect their credit scores, punctiliously document their income and expenses, and remain aware that every financial transaction they undertake is documented.
It's a different world than it was even ten years ago, and when your livelihood
depends on your ability to obtain a mortgage loan (as real estate investors' do), protecting yourself against false information and allegations becomes a matter of life or death for your career in real estate.
